Earlier today, there were speculations that the Central Bank of Nigeria (CBN) was set to devalue the Nation’s currency- Naira, to N631 to the dollar from N461.6 it sold at the Importers and Exporters (I&E) window the previous day.
Although those rumours about the naira devaluation have since been debunked by the Central Bank of Nigeria, the purported news is coming barely 48 hours after President Bola Ahmed Tinubu announced the plans of the federal government to unify the country’s exchange rate to stimulate the economy.
The apex bank described the report as “the imagination of the newspaper”, and said the Investors & Exporters (I&E) window traded at ₦465/$1 on June 1.
Although the CBN can sometimes open such a window, we can categorically say that the I&E window is not new and isn’t directly linked to the naira’s official value against the dollar. This is because the CBN sometime in April 2017, opened a similar window for investors and exporters.
Tagged: “Investors’ & Exporters’ FX Window”, CBN’s Director in charge of Financial Markets at the time, Alvan Ikoku, said the new window would boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.
This market-determined exchange rate may differ from the CBN official exchange rate. In this window, two entities may wish to trade and exchange a dollar for naira above the CBN official exchange rate.
When both parties act in this way, it does not necessarily imply that the official exchange rate set by the CBN has changed. In reality, it is irrelevant to the official rates.
Read also: What will Bola Tinubu’s administration mean for the Nigerian crypto community?
What we know
In his inaugural speech, minutes after he was inaugurated as the 16th president of the country, Tinubu said, “Monetary policy needs a thorough house cleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”
We can, however, categorically state that the President on Tuesday, met with top heads of strategic institutions upon resumption of office, of which the CBN Governor, Godwin Emefiele was part. Other persons include the Group Chief Executive Officer of the Nigerian National Petroleum Company Limited, Mele Kyari.
Although the agenda and outcome of that meeting were not disclosed, we can gather that the issue of the exchange rate was discussed at the meeting. But suppose previous antecedents of administrations in Nigeria are anything to go by, one can certainly expect the issue of devaluation to be revisited soon given that the International Monetary Fund (IMF) had earlier advised the President Buhari-led administration to devalue the naira, but was rejected.
Read also: The Nigerian tech industry under Buhari: A success story or a missed opportunity?
What does the Naira devaluation mean?
For proper context, devaluation is the reduction in the value of the money of one country when it is exchanged for the money of another country. It is a viable and attractive option for nations in recession or experiencing low foreign direct investments.
According to a study, a country might devalue its currency to address the trade imbalance. Devaluation lowers the price of a nation’s exports, making them more competitive in the international market, which in turn raises the prices of imports. If imports are more expensive, domestic consumers will be less likely to buy them, supporting domestic businesses even more.
A better balance of payments results from rising exports and falling imports because the trade deficit narrows. In other words, a country that devalues its currency can cut its deficit because there is a greater demand for less-expensive exports.
What it means for the fintech industry now
Although devaluing a currency may seem like a good idea, there are drawbacks. Increased import costs shield domestic industries, but without the pressure of competition, they might become less productive.
Nigeria’s fintech industry has experienced remarkable growth, transforming the country’s financial landscape. However, the devaluation of the Nigerian Naira can have significant implications for this thriving sector.
Naira devaluation may lead to increased operational costs for fintech companies in Nigeria whose major costs are foreign-driven, especially if they have been privileged to have had access to the official rate of the CBN.
Many fintech firms rely on international partnerships, software licenses, and infrastructure that are priced in foreign currencies. A devalued Naira means that these costs become relatively higher, putting financial strain on companies.
The increased costs may impact their ability to invest in research and development, expand their services, or maintain competitive pricing, ultimately hindering growth and innovation within the industry.
Yet, given that buying Nigerian stocks or fintechs has become considerably more affordable, FDI may rise. Investors, though, may also grow cautious and find investing to be unappealing. This is also because when they need to convert to their local currencies, their returns can be impacted. Once more, this assumes that the business or startup had access to the CBN’s official exchange rate.
However, if the parallel market rates were being used by the fintech sector prior to any devaluation, then a devaluation to N631 can result in more investments but only marginally impact profits, given that with the prior exchange rate, each player could set their rates within the parallel market range.
Whatever actions the Nigerian government decides to take in the upcoming weeks or months, it is crucial for them to be mindful of the implications for the country’s thriving sector and the need to exercise prudence over any potential negative repercussions.
Read also: Naira Devaluation and Why Nigerian Startups Should Start Thinking Global
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